CMS issues final rule for IPPS and LTCH

In the rule, CMS finalized a 2.6% payment increase for inpatient hospitals in FY 2026, slightly higher than the 2.4% initially proposed by the agency in April. The payment increase reflects a 3.3% market basket update, reduced by a 0.7 percentage point productivity adjustment.

According to CMS, the 2.6% payment update will increase hospital payments by $5 billion in 2026, including around $2 billion in projected Medicare uncompensated care payments for disproportionate share hospitals and $192 million in additional payments for inpatient cases that involve new medical technologies.

Medicare-dependent and low-volume hospitals could also see an additional $500 million in payments if Congress decides to extend two subsidies currently set to expire Sept. 30. According to Fierce Healthcare, Congress has extended these subsidies multiple times before.

The rule also finalizes a 2.7% payment update for LTCHs, which includes a 3.4% market basket increase reduced by a 0.7 percentage point productivity adjustment. According to CMS, this update will increase LTCH payments by approximately $72 million in 2026.

In response to the rule, hospital groups said they appreciated the small top-line increase and support for disproportionate share hospitals but said hospitals still need more funding as they face ongoing financial challenges and upcoming Medicaid cuts. 

Changes to new TEAM payment model

Aside from the payment updates, the final rule also announced broader policy changes, including to TEAM, a new mandatory payment model that will go into effect Jan. 1, 2026. Under the model, certain acute care hospitals will be required to participate in episode-based payments for five common surgical procedures.

In the final rule, CMS made a few changes to the model, including:

• Implementing a limited deferment period for certain hospitals
• Adding a neutral score for hospitals that don't generate enough quality data for analysis
• Broadening certain waivers for skilled nursing facilities
• Using patient-reported outpatient outcomes to assess quality and eliminate downside risk for low-volume hospitals that do not have at least 31 episodes of care in a given category

So far, hospitals have pushed back against TEAM, saying that it may not be feasible for some providers, particularly low-resource hospitals.

"The AHA has long supported widespread adoption of meaningful, value-based and alternative payment models to deliver high-quality care at lower costs," Thompson said. "We remain worried that [TEAM] will not advance these objectives and puts at particular risk hospitals that are not of a large enough size or in a position to support the investments needed. This is why we continue to urge the agency to make TEAM voluntary."

Separately, Eddie Qureshi, CEO and founder of Rainfall Health, which is working with hospitals on TEAM compliance, said that "not a single one" of the over 100 hospitals his company is working with are fully prepared for the new model.

"Most health systems underestimate the scope and stakes of this model: while it narrowly targets a set of procedures, it broadly expands hospital responsibilities around care coordination, quality, and outcomes," Qureshi said. "Our analysis shows that each system faces an average of $14 million annually — and more than $70 million over the model’s term — in potential penalties or incentives."